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Exclusive: KCG nears $12 million settlement with SEC on Knight glitch - sources

Traders work at the Knight Capital kiosk on the floor of the New York Stock Exchange August 3, 2012. REUTERS/Brendan McDermid
Traders work at the Knight Capital kiosk on the floor of the New York Stock Exchange August 3, 2012. REUTERS/Brendan McDermid

By John McCrank and Matthew Goldstein

NEW YORK (Reuters) - The successor company to Knight Capital Group is near a settlement of around $12 million with the U.S. Securities and Exchange Commission related to last year's trading glitch that disrupted equity markets and led to Knight's sale, according to two sources.

The board of KCG Holdings Inc has approved the amount and the process is in the hands of the SEC, but nothing has been finalized, the sources said.

KCG spokeswoman Sophie Sohn declined to comment. SEC spokesman John Nester declined to comment.

Knight was near a deal with the regulator last fall that would not have included a financial penalty, and again in the spring, with an amount closer to $10 million, one of the sources said. The most recent deal failed to happen because of a change in leadership at the SEC, the person said.

The other source familiar with the matter said the regulatory investigation was aided by the cooperation of a whistleblower. Earlier this year, the New York Times reported that a whistleblower had contacted the SEC about the Knight trading glitch.

Jersey City, New Jersey-based Knight was bought by Chicago-based Getco Holding Co for $1.4 billion in a deal that closed in July.

Knight disclosed in November that it was being formally investigated by the SEC as to whether Knight complied with rules and regulations such as the "market access rule."

The market access rule requires brokers to put in place risk control systems to prevent the execution of erroneous trades or orders that exceed pre-set credit or capital thresholds.

On August 1, 2012, a software problem at Knight led to millions of unintentional orders flooding into the market over a 45-minute period, leaving the firm with a huge position it had to unload at a total loss of $461.1 million.

Following the glitch, Knight secured $400 million in rescue financing - in exchange for a stake of more than 70 percent in the company - from a group of investors that included Getco and was led by Jefferies Group Inc. Jefferies later helped finance Getco's proposed acquisition of Knight.

The incident was one of several high-profile technology problems that jolted the securities industry last year.

The SEC announced a technology roundtable just two days after the glitch, and former chairman Mary Schapiro asked SEC staff to speed up efforts to propose a rule that would set industry-wide standards "to ensure the capacity and integrity" of market systems.

(Editing by Matthew Lewis)

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